Emms Gilmore Liberson teams up with the IRPM on rent arrears checklist
Forfeiture of long residential leases with high ground rent arrears
Associate Helena Bannister provides a checklist for an alternative arrears collection method
Do you have a long residential lease with a high ground rent? Is the tenant in ground rent and service charge arrears? Is service charge reserved as rent under the lease? If so, there may be an alternative route for recovery, of not just the ground rent arrears but also service charge arrears, without the need for a “final determination” in respect of those arrears.
The restrictions on forfeiture of long residential leases are set down by sections 166-172 of the Commonhold and Leasehold Reform Act 2002 (CLRA). These statutory provisions effectively prevent a landlord serving a s.146 notice (Law of Property Act 1925), as a precursor to forfeiture of the lease, until there has been a “final determination” of breach of the lease (via court or Tribunal proceedings) or an admission of breach by the tenant. This presents a lengthy and potentially costly litigation hurdle. Even where there is a mortgage, most lenders will not settle any arrears on behalf of their mortgagor unless they first see the Order providing that final determination, or even the s.146 notice which follows.
However, the route summarised below can provide an effective alternative. The threat of forfeiture of a valuable lease will normally prompt payment of arrears. By carefully planning a “rent” forfeiture, there is the potential of a bonus service charge arrears recovery as well (if it is also reserved as rent). Inevitably there will most likely be some shortfall on recovery of the landlord’s costs (even if successful) and so it will be a more cost effective option in cases where the ground rent is high and/or the arrears have accumulated to a sufficiently high level.
- Is there a workable forfeiture clause in the lease? Is service charge reserved as rent?
- Is there a workable costs recovery clause in the lease? Ideally it should be wide enough to include costs of (or ideally “in contemplation of”) forfeiture proceedings. If it is too narrow, or absent entirely, direct costs recovery from the tenant may be a problem and you will have to simply rely on the Court’s general discretion on costs. At the very least you want to ensure there is wide enough scope within the service charge provisions of the lease for the landlord to recoup any related costs through the annual service charge, in case direct recovery from the defaulting tenant is not achieved.
- Have the above statutory preconditions on forfeiture for rent arrears been complied with? Are the ground rent arrears more than £350 (when calculating the unpaid amount, any default charge should be excluded), or have they been unpaid for a period of more than 3 years (SI 2004/3086). Are the ground rent arrears properly due and payable? Note in particular the need for a s.166 notice (CLRA) to have been served (but see 4 below). If the s.166 notice has not been served, the tenant will not be liable to pay even if the lease requires it.
- Ensure there has been no waiver of the right to forfeit for the arrears you wish to forfeit for. If this is a case where you wish to collate a few quarters’ rent arrears before issuing proceedings then DON’T serve a s.166 notice when each ground rent instalment falls due. (Some landlords serve such notice as a matter of course with each demand, which is fine in any normal scenario, but if ground rent forfeiture is planned hold these notices back until you are ready to go.) The right to forfeit for each rent instalment arises as soon as the s.166 notice expires (no s.146 notice or final determination is needed for a ground rent forfeiture) and so a waiver of the right to forfeit can occur as soon as that notice expires (for example when the next rent demand, or any other demand, is sent out). Wait until you have demanded all the ground rent sums you want to forfeit for, then serve the s166 notices at the same time. This gives you one date (when those notices expire) after which you can commence forfeiture proceedings for non-payment of the ground rent. Put a stop on the account, and stop all communications/demands etc in relation to the lease on the date the s.166 notice(s) expires. There may inevitably be arguments of waiver from the tenant. Try to minimise these arguments by ceasing to discuss anything further with the tenant until the proceedings have been issued and served. In any event ensure all further contact is stated as being strictly without prejudice to the forfeiture proceedings.
- Issue forfeiture proceedings (and serve on any lender, which may prompt payment from them).
As a condition of any relief from forfeiture the Court can be asked to order that the Tenant is to pay “all the rent in arrear” (s.138(2) County Courts Act 1984). This can therefore potentially include not only the ground rent arrears, but also any other sums which are reserved as rent under the lease. Most leases reserve service charge as “rent” and so such sums can include historic service charge arrears and any other such sums falling due under the lease up to the date of the hearing. This can be requested at the hearing (or hopefully via settlement negotiation with the tenant to avoid the cost of a hearing). There is the potential for argument on this point. Not every Judge will necessarily order that all arrears should be paid by the tenant to avoid forfeiture. However, the case of Maryland Estates v Joseph  1WLR83 (Court of Appeal) arguably provides authority for all such sums being payable as a condition of relief from forfeiture. This firm has successfully achieved such an order recently, based upon that argument.
It is likely the landlord’s costs (or a substantial proportion once assessed by the Court) will also be ordered as payable by the tenant as a condition of relief from forfeiture.
This procedure above provides a potentially swifter route than the alternatives. It can be a very effective way of collecting in large arrears debts where there is the high ground rent to use as the main basis of the action. There is no guarantee the tenant will not later seek to argue at Tribunal the reasonableness of the sums they have had to pay (s.27A Landlord & Tenant Act 1985) but the landlord will in the meantime have the arrears paid, and hopefully the majority of its costs. The onus would be on the tenant to take it any further.
Specific legal advice on the facts of each case should always be sought before embarking upon litigation.
This article was written in conjunction with the Institute of Residential Property Management. Find out more at: www.irpm.org.uk